Investment Advice: New fiduciary rules for retirement plans

The Department of Labor (DOL) recently announced a new ruling for 2017 that puts more responsibility on the financial services industry. In particular, individuals that service 401(k) plans and IRAs will be required to accept the role of a fiduciary. We believe that this is good news for employees and that this type of oversight will eventually work its way into nonretirement plan accounts and services.

By law, a fiduciary has a duty to act in another party’s best interest. Next year, anyone who directly or indirectly makes recommendations to a retirement plan, plan fiduciary, plan participant or beneficiary, or an IRA owner who for a fee or other compensation gives advice on the management of assets for plans and participants or IRA owners will be considered a fiduciary.

This type of increased regulation should not be surprising. Retirement assets total in the trillions of dollars with 401(k) plans and IRAs growing at significant rates. Over 10,000 baby boomers are expected to retire each day from now through the end of the decade. Currently, there are almost 850,000 401(k) plans and over 60 percent of retirees will move their money out of these plans into IRAs.

Commissions paid and other compensation practices are under particular scrutiny. In 2012, Australia outlawed commissions, mandated a fiduciary duty and required full fee disclosures. In 2013, the United Kingdom banned commissions. In both cases, public trust and fee transparency have increased.

In 2012, the United States required 401(k) fee disclosure rules. With the recent DOL rulings, there will be expanded fiduciary rules, particularly to IRAs, restrictions on prohibited transactions including fees, and certain exemptions for prohibited transactions using a Best Interest Contract (BIC). But even with a BIC, advisors must acknowledge a fiduciary status, give prudent and impartial advice, disclose potential conflicts of interest, disclose information about their revenue model, and receive no more than reasonable compensation.

One of the chief ways that ERISA protects employee benefit plans is by requiring that plan fiduciaries comply with fundamental obligations rooted in the laws of trust. Fiduciaries must manage plans assets with undivided loyalty to plans and their participants and beneficiaries, including IRAs. When fiduciaries violate ERISA’s fiduciary duties or the prohibited transaction rules, they may be held personally liable for the breach.

Recent surveys have explored what plan sponsors want with these new regulations. They have found that even more plan sponsors are concerned about their fiduciary duty. Almost 70 percent want advisors willing to take on a formal fiduciary role. Increasingly, sponsors want their advisors to be a retirement plan expert that can provide guidance on plan design, compliance monitoring, participant advice, asset custody, investment selection and management, record keeping and administration including ERISA compliance monitoring. Most importantly, they also want clear and simple fees.

Given these changes being required by the DOL, what should plan sponsors do? First of all, understand that you are a fiduciary and have duties and obligations that must be fulfilled. You should ask all current providers that service your plan if they are a fiduciary. You should benchmark all plan fees and investment expenses on a regular schedule. Importantly, document in company minutes all your actions, including your retirement committee meetings. Finally, you should have a documented Investment Policy Statement (IPS) and review it no less frequently than annually.

Most plan sponsors don’t have the in-house expertise to manage these issues. They should know if their retirement plan advisors are fiduciaries and serve in that capacity for them. They should understand the fees they are paying and how they are being disclosed. They should know what their policies and procedures are for disclosure of conflicts of interest and how they can avoid them.

We are advocates of this new ruling as we continue to look out for the best interests of our clients, whether a law requires us to or not.

Andy Muldoon is a senior vice president for The Trust Company with offices in Chattanooga, Knoxville and Johnson City, Tenn.